USD/JPY Forecast: BOJ Signals Caution in Policy Review, Yen Tumbles

USD/JPY Highlights

• Bank of Japan reviews monetary policy, signaling possible changes
• New governor Kazuo Ueda stresses need for evidence to achieve 2% inflation target
• Yen tumbles, as BOJ removes pledge for interest rates to stay at current or lower levels

USD/JPY Overview

On Friday, the Dollar/Yen saw a sharp increase after the Bank of Japan (BOJ) announced a review of its monetary policy while keeping interest rates ultra-low.

At 09:57 GMT, the USD/JPY is trading $136.070, up $2.263 or +1.69%. On Thursday, the Invesco CurrencyShares Japanese Yen Trust ETF ( FXY) settled at $69.54, down $0.13 or -0.19%.

BOJ Signals Cautious Policy Shift

The new governor, Kazuo Ueda, signaled a cautious start by leaving room for future changes. He also stressed the need for more evidence to achieve the BOJ’s 2% inflation target sustainably.

The BOJ maintained its commitment to “patiently” keep policy accommodative but removed a pledge for interest rates to stay at “current or lower levels,” giving the bank more flexibility for future policy tweaks.

Meanwhile, the yen tumbled, and Japanese bonds and stocks rallied on expectations that Governor Ueda would gradually phase out the massive stimulus program of his predecessor, Haruhiko Kuroda.

BOJ Reviews Policy Amid Inflation Concerns

The BOJ will spend one to one-and-a-half years on the review to guide policy during Ueda’s five-year term. The BOJ projected inflation to slow to 1.6% in fiscal 2025. And highlighted a lack of conviction among central bank policymakers on the durability of price growth.

The bank must be vigilant to the side-effects of YCC, such as market distortions and strain on bank profits, while keeping monetary policy ultra-loose.

Tokyo Inflation Exceeds Expectations, Posing Challenge for BOJ

Ahead of the Bank of Japan’s policy meeting on Friday, government data revealed that core consumer inflation in Tokyo exceeded expectations in April, with an index excluding fuel costs rising at the fastest pace in four decades. This presents a challenge for the new central bank chief in maintaining ultra-low interest rates.

The core CPI, which excludes fresh food but includes fuel costs, rose 3.5% YoY in April, surpassing market expectations for a 3.2% rise and the BOJ’s 2% target. Meanwhile, the core-core CPI, which strips away both fresh food and fuel costs, rose 3.8% YoY, marking the fastest annual increase since April 1982. This may challenge the BOJ’s view that recent price rises are temporary.

In separate data, Japan’s factory output in March beat market forecasts, rising 0.8% MoM, and manufacturers expect further increases in April and May.

Although Japan’s economy is recovering from the pandemic’s impact, risks of a global slowdown and rising food prices continue to affect the outlook for exports and consumption.

Technical Analysis

The USD/JPY is spiking higher on Friday, trading well above the pivot at $133.443. The move may have enough upside momentum to extend the rally into R1 or $137.245.

For a look at all of today’s economic events, check out our economic calendar.